Rupert Davies

2050: we’re not heading inevitably for two degrees, its not impossible but much work is still needed.

“I'm forever an optimist. But we've seen the scientific data and the reports from the IPCC the world is still currently not on track to meet 2C. Therefore I don't think there's really a debate at the moment on what commitments are needed by 2050, we need to start seeing the actions early, particularly around climate adaptation and mitigation. Much of the focus has been on reducing carbon emissions, and I think the methane reduction commitments have been quite significant this year following COP26. The conversation has also moved on to protecting biodiversity and natural capital. And I think that's been missed out in previous climate discussions, protecting the natural carbon sinkholes of the planet.” 

Rupert says it’s all down to international cooperation. “Everyone has a role to play in meeting global climate targets whether you're an investor, policymaker, or corporate”. In other words, I'm cautiously optimistic on the 2050 commitments and ultimately one and a half degrees is not unachievable, but two degrees is more likely – but if we don't aim for a 1.5C target we will never hit it.”

The fund sector can lead but it also needs to be led.

Rupert believes that “investors have a huge role to play in creating a more sustainable global economy. If you're assessing sustainable opportunities the investment horizons are longer-term and can be decades instead of quarters so you really need to put capital into the companies that are positioned to solve global sustainability challenges, however timing is key too early can almost be as bad as too late. Ultimately there is a lot of opportunity to get returns for investors while creating a positive impact such as climate technology, water, biofuels, hydrogen etc.”

The sector has in fact led the way, Rupert says. “I feel like investors often are ahead of the policymakers. Investors have been knocking corporate doors for decades, while actively engaging with Boards to drive improvement in ESG related issues and disclosures. Policy intervention such as the Sustainable Finance Action Plan or TCFD is necessary to help shape the regulatory environment in which we operate and to standardise disclosures, which ultimately informs our investment decision making.” “Therefore, I feel that the investment industry  is there to leverage  ownership of companies whether it is through private equity, listed equities or fixed income to ensure that the ESG risks are effectively being managed, and see ambitious sustainability targets being set by Boards which are tied back to executive compensation plan and the appropriate disclosures supporting these. “

Ultimately investors should direct capital away from business activities with high stranded asset risk to those that can either transition or that are already classified as sustainable in order to make an impact. 

Meeting global climate targets and the UN SDGs with require a significant amount of investment which cannot be achieved through public financing alone from Governments, so private finance from the investment management industry is key to plugging the spending gap.”

Sustainability assessment: the Sustainable Development Goals offer common ground but also scope for greenwashing.

Rupert says the debate around sustainability has moved into important social areas.

“Sustainability is not just about environmental issues such as climate. For me, it's also improving social equality, making sure that as the global economy shifts towards a cleaner and greener future, that inequality gap is also being reduced, it must be a just transition which is a topic that is becoming more prevalent in industry wide discussions. Impact Investing is a rapidly emerging area that sits in the middle of that debate, for me it is also an incredibly interesting area of sustainable investment that I would want to follow more closely in my career. The point I am trying to make is that when you talk about sustainable investing or ESG it’s no longer purely about ‘material non-financial risk management’, the focus is now on what are the positive/negative environmental or social impacts that all companies’ products and services have.” 

On the UN Sustainable Development Goals, he says: “The goals are great, because they give everyone a common framework to work towards. I think the problem with the SDGs as an investment tool is that not all these goals are investable. Goals such as 16 Peace and Justice or 17 Partnership for the Goals, that's more for policymakers to focus on, whereas 2 Zero Hunger, 7 Affordable Clean Energy, 6 Clean Water and Sanitation, you know, can be mapped back to the companies in a portfolio. The downside of the UN SDGs is that they're very susceptible for the use in greenwashing.”

“You'll see corporate reports saying, we're aligned to the SDGs, here are the UN SDG labels that we contribute to, but what we don't necessarily see as much is the quantitative metrics behind that. So, it’s important to challenge companies on this by asking what's your revenue alignment to these SDGs and does your business have any kind of adverse negative impact on the SDGs?”

“If you're talking about sustainability themed or impact, especially to investors who may not be necessarily as knowledgeable in this space, it’s useful to map the outputs of your investment process to the goals, but you need a robust process in place that can be monitored and measured in order to avoid the pitfalls of greenwashing.”

Emerging markets: the only way to tackle investment is on the ground.

Rupert notes that the physical impacts of climate change are not equal and unfortunately emerging markets often bear the brunt of these impacts, emerging market companies can be more effective at providing solutions and data that can address the regional environmental and social demands versus companies based in developed markets. He says Asia is a sleeping giant in terms of sustainable development, but now “you now see a significant number of new commitments coming out of emerging market economies following COP26, these will create shifts in the regulatory environment similar to those that we have seen in Europe and the US, and with-it strong tailwinds for sustainability driven companies depending on state support, governance structures and data availability. 

“Even if you use a 3rd party ESG data provider or even multiple providers, the data is never perfect. When you look at emerging markets the data coverage is almost non-existent so investors must take a much more active approach, and company engagement is incredibly useful at filling in the data gaps. Engagement will give investors a much better understanding of the ESG risks and opportunities for EM companies because the ESG ratings are built on corporate reporting and other disclosures, which often EM companies lack vs their peers in developed markets I've participated in some incredibly informative engagements with EM small and mid-cap companies that have not been given an ESG rating, but are already doing a lot of the right things behind the scenes, some of these companies are providing really innovative products or services in areas like water treatment, mobile banking which reflect the regional challenges where they operate”.

The solutions to climate change include carbon capture. Let’s not demonise the companies who can deliver it.

Rupert says the simple answer to reducing global temperature rises is to stop burning fossil fuels. “Obviously that’s easier said than done. The world is still heavily dependent on fossil fuels, and you can't phase them out tomorrow, but there are key technologies that will help us get there. The first is carbon capture and storage. Being able to remove the excess carbon out of the atmosphere and store it underground. This is only really starting to see commercial scalability and there's still a lack of political support, which I'm surprised about when comparing this to renewable subsidies.”

“It’s interesting, because some of the companies who are best positioned to invest in and develop large renewable energy capacities and CCS plants fall within the sectors who are getting the most calls for divestment, namely utilities and energy companies.  These entities have the infrastructure and the capex to effectively roll this out on a commercial scale. This means that in terms of simply divesting from all fossil fuel companies only reduces the carbon footprint of your portfolio, I don’t think it’s very productive in supporting the low carbon transition by excluding whole sectors, participating in investor coalitions and collaborative engagement frameworks are far more effective.”

“Hydrogen is another key technology for meeting Net Zero, but it has to be green hydrogen rather than grey or blue hydrogen. It seems counterproductive creating a clean energy source while relying on a combination of natural gas and carbon capture. Renewables obviously will play a significant part and have already demonstrated their advantages over fossil fuels in terms of carbon and energy production costs but large-scale energy storage is still needed to fully support the switch from fossil fuels to renewables”. 

Rupert says in addition to the production of clean energy we also need to invest in the infrastructure for distributing it, which will support the growth of other low carbon technologies such as electric vehicles. “The technology is available but there also needs to be the demand for it to become economically viable.” He concludes: “It’s also about how people can consume resources. Technology has a big role to play, but I think a lot of it also comes down to people's own behaviour.”